With the Chancellor under pressure to claw back the huge amount of money the government has borrowed during the pandemic and rock bottom interest rates, it’s a challenging time for savers and investors. If you don’t already have an ISA, now is the time to explore the benefits.
Even with the current economic challenges, the core reasons for owning an ISA as well as investing principles remain the same. Here are 7 reasons to invest in an ISA:
1) Tax breaks
There is no tax to pay on gains on money held within an ISA, and you don’t need to declare ISA savings on your tax return. Your money is sheltered from capital gains tax charged on the profit or gain made above the current £12,300 annual allowance.
You will also avoid the tax usually charged on any dividends that would be applied on income-paying investments outside an ISA above the annual £2,000 limit per investor. For cash ISAs you pay no tax on interest earned.
2) Free government cash
The Lifetime ISA comes with a compelling offer of free cash top-ups when you save. Designed for those building a deposit for a first home or for retirement, you can pay in up to £4,000 a year in a Lifetime ISA (which forms part of the £20,000 yearly allowance) and bank up to £1,000 in government hand-outs.
The money can be used to buy a first property worth up to £450,000. Alternatively you can withdraw it from the age of 60 to boost your income in retirement. If you take the money for any other reason there’s an exit penalty of 20%.
The rate is usually 25%, but was reduced last year to help people access their money for less during the pandemic. It is due to increase again in April. You must be between 18 and 39 to open a Lifetime ISA which can be opened as a cash or stocks and shares account. Beware of the £450,000 limit – anyone hoping to buy a property in London could struggle to meet this requirement.
Those who opened a Help to Buy ISA before the 30 November 2019 deadline, can keep saving until 30 November 2029 when accounts will close to further contributions. In a Help to Buy ISA you receive a government top-up of £50 for every £200 you save, up to a maximum of £3,000 over five years. You must claim your bonus by 1 December 2030. Alternatively you can convert it to a Lifetime ISA.
3) ISAs are a valuable long-term investment vehicle
You can use your ISA to buy shares in individual companies or investment funds. Historically, stock market returns outweigh those from cash. While cash is regarded as risk-free, there is a great risk of the value being eroded by inflation.
Calculations from Brewin Dolphin, the wealth manager, found that depositing £100 in cash from 2011 to the end of 2020 would have seen its value fall in real terms to £87.82, as inflation picked up and interest rates remained low following the financial crisis of 2008. Meanwhile, investors in the UK’s FTSE 100, 250, and All Shares markets saw real returns of 33.87%, 93.68%, and 43.65% respectively.
4) ISAs are flexible
Investors rushing to use their annual allowance before the end of the tax year might be worried about hurrying an investment decision. You can pay into your stocks and shares ISA and opt to keep in cash until you can decide where it is best invested. Just make a note not to leave it too long.
5) You don’t need much to get started.
Not everyone can afford to save as much as they would like each and every year, but putting a little something away every month is better than doing nothing. You can start investing in an ISA with as little as £25 per month with many platforms. Over time even small contributions could build up to a sizeable fund.
6) Invest for good using your ISA
There is an increased appetite among investors to back companies that adhere to goals under the environmental, society and governance (ESG) banner. Those passionate about improving society, climate change and stamping out boardroom greed can choose ISA funds you can choose that target these areas.
For example some funds only invest in companies that are contributing to the decarbonisation of the world economy. You can find funds that look to improve areas you feel most passionately about.
7) ISAs are not just for grown-ups
A Junior ISA offers parents a chance of building up a meaningful fund for their children. It allows you to stash away £9,000 each tax year in a cash or investment version of the account. The money is locked away until the child reaches 18 and earnings are tax-free.
Children can start managing their account on their own from the age of 16. Once a Junior ISA has been set up by a parent or legal guardian, anyone can contribute to it. Those aged 16 or 17 can have a Junior ISA allowance plus a cash ISA allowance.
One type of ISA – an Innovative Finance ISA – allows savers to make loans through peer-to-peer companies. They match people who have money they’re willing to invest, with individual borrowers. While these ISA can offer big returns, they hold much bigger risks and the returns are not guaranteed.
Currently it appears they are under pressure. Some companies have been warning that there is a delay in getting money out. If you’re interested in peer-to-peer lending make sure you understand how it works and the risk involved.
Find the right platform for your ISA here.
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